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UK Cigarettes and Tobacco Market – Consumer Segments and Behaviour

The UK cigarettes and tobacco market is somewhat an exception within marketing, the question; Why is it that despite the decline in the smoking population and consumer spending, the cigarette and tobacco market continues to grow year on year…? Price? Consumer trends? Buying behaviour? Throughout this blog I will attempt to provide some insight and analysis into this question. To start, the cigarette and tobacco market is split into four main sections: cigarettes, hand-rolling tobacco (HRT), cigars and pipe tobacco. In 2015, £20.1bn was paid for cigarettes and tobacco products by the UK citizens; this accounted for 1.7% of all consumer expenditure.

Cigarettes are by far the highest contributing aspect of the UK cigarettes and tobacco market, currently contributing 85.2% of all revenue generated, in 2015 cigarettes generated sales that amounted to 17.12bn; an increase of 3.6% from the previous year. Over the last five years the market share has decreased slowly, this is due to a period of economic uncertainty in the UK causing more consumers to opt for the cheaper option being HRT. In Kantar Media’s annual Target Group Index (TGI) they found that 16.8% of men and 16.3% of woman had frequently smoked cigarettes between July 2014 and June 2015, the average smoker consuming around 20 cigarettes a day. A clear trend within cigarettes is its negative correlation with age, it showed that as age increased the penetration of cigarettes decreased; this starts at 20-24 year old having the highest prevalence of smoking at 21% and then decreasing slowly through age classes until 65+ where smoking prevalence rests at 10.2%. The survey also showed that as social class and annual earnings decreased the prevalence of smoking increased, social grade E had the highest prevalence at 26.1% compared to social grade B having a prevalence of 10.3%.

Hand-rolling tobacco (HRT) has seen gradual growth since 2011 as more consumer switched to the cheaper product, since 2011 sales of HRT have increased 19.3%. In 2015 sales for HRT increased to £2.73bn, this improved its total market share of the UK cigarettes and tobacco market by 1% between 2011 and 2015. This segment of the UK cigarettes and tobacco market is particularly favored by men being used by 11.3% of them and only being used by 8.7% of women, making a percentage of 9.5% of all people that consumer HRT. It is clear that with this specific segment the lower the social class and family income the more this product is consumed, 19.2% of adults social grade E and 16.8% of families earning less than £9,999 consumed this product. Another interesting trend was the effect of employment on the consumption of HRT, it was found that 14.2% of unemployed adults who are able to work consume HRT; this is compared to the combined 18.7% of adults who are in full or part time work. It was also found that 20.3% of adults renting housing from the council consumed this product compared to the 4.1% of adults who owned their homes outright.

Cigars and pipe tobacco are still fairly niche products within the UK cigarettes and tobacco market, however it has seen growth in recent year despite long term negative growth from both. Cigars currently hold 1.2% of the UK cigarettes and tobacco market and pipe tobacco only 0.1%, in total these sectors have contributed £249m in 2015. Cigars and pipe tobacco show the opposite of cigarettes and HRT, this is because the higher the class or income the higher the consumption; after all they are seen as expensive luxury items. For cigars, social grade A had a prevalence of 2.6% of adults and pipe tobacco held 1.1% of adults; compared against the social grade E which had 1.7% for cigars and social grade D which had 0.4% for pipe tobacco. Despite the stereotype that these segments are consumed by an older generation it is an interesting discovery to find that for both they were consumed the most by individuals aged between 20 and 34.

Now that we understand the current situation of the UK cigarette and tobacco market and the segments within it, we can now delve into the emerging consumer trends that will shape this market in the future. The first trend is the continuing reduction in the number of smokers in the UK, this has been a long term goal for the UK and EU governments; and can also be contributed to the raising awareness of the damages that smoking can cause to an individual. According to the TGI, 11.7% of smokers in the UK had attempted to give up within July 2014 and June 2015; this was done mostly by those aged 20-44 and was prominent within families with a lower class or income. Within decline it smoking prevalence throughout the UK large tobacco companies such as Imperial Brands PLC and British American Tobacco PLC, who are the largest brands within the UK cigarette and tobacco market, will need to invest more into new emerging markets and new product innovation.

Nicotine replacement therapy was one of the first kinds of replacements that where publicly available, products such as: patches, gums, aerosols and inhalers. Patches first hit the market as a prescription drug in 1992, however in 1996 these patches became publicly available. Given the age of these products it is no surprise that the majority of users were aged between 25 and 44 as these are the products that have been around for most of their lives and have had the most publicity. In more recent years the UK cigarettes and tobacco market has been saturated with a range of different products to aid the quitting of smoking, these include: E-cigarettes and vaporizers, safe cigarettes, herbal tobacco and other treatments such as acupuncture and hypnosis. For e-cigarettes and vaporizers they found more popularity with hardened smokers and those aged 15-24, for smokers this method replicates the smoking action allowing them to smoke without the harmful chemicals. In regards to those aged 15-24 most vaporizers do not have an age restriction as 0% nicotine liquids are available. Safe cigarettes and herbal tobacco also allow the consumer to replicate the action of smoking but neither contain any nicotine, herbal tobacco has been particularly popular with marijuana smokers as it provides a healthier alternative to real tobacco; This has been heavily implemented in Amsterdam as it is still illegal to smoke tobacco indoors but is not illegal to smoke herbal tobacco indoors. Acupuncture was most popular with those aged 35-44 and hypnosis was most popular with those aged 20-24, these methods are more focused around the perception of the treatment rather than actual scientific evidence; which has led to them both being very niche services.

Now we are going to move onto why consumers act the way they do within the UK cigarette and tobacco market; my personal opinion is based around the manipulation of addiction. Nowadays businesses within the UK cigarette and tobacco market understand that what they are producing is an addictive substance and so can increase the price of their products dramatically, essentially taking advantage of their consumers as they know they will continue to purchase the products regardless of price. This can be showed by the increase in price for each segments of this market, the most significant of which is cigarettes. In 2010 the average price of twenty cigarettes was £6.13, a mere four years later the price had reached £8.23; this equated to a rise in price of just over 25% in that time. During the same time however the amount of cigarette smokers in the UK had been decreases slowly, in 2010 21% of people smoked cigarettes; four years later only 18.3% of people smoked.

The information above also reflects the financial documents of most tobacco companies, for this example I will use Imperial Brands PLC. In 2011 they produced a turnover of 29.2bn of which the pre-tax profit was 2.2bn, a year later revenue dropped by 2.2% and profit dropped by 49.8%. If we fast forward to 2014 however despite further decline in revenue totaling -11.4%, the profit of the company had taken a different turn having an increase of profit from 2012 totaling 38.4%.

This clearly shows that despite the decrease in the smoking population and revenue that is produced by tobacco companies, the addiction of their product allows them to rapidly increase price of their products and in doing so the profit that they can make.